The IRS has issued a set of FAQs concerning certain emergency financial aid grants to students. The IRS FAQs confirm that these emergency financial aid grants are excluded from income and therefore not taxable.
Savingforcollege.com previously reported that the emergency financial aid grants to students are tax-free, based on our interpretation of the section of the Internal Revenue Code concerning disaster relief payments.
The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) establishes two emergency financial aid grant programs for students. One involves unexpended Federal Work-Study (FWS) and Federal Supplemental Educational Opportunity Grant (FSEOG) funds. The other involves a new Higher Education Emergency Relief Fund (HEERF), at least half of which must be used for emergency financial aid grants to students.
The IRS FAQs clearly state that emergency financial aid grants under sections 3504, 18004 and 18008 of the CARES Act for “unexpected expenses, unmet financial need, or expenses related to the disruption of campus operations on account of the COVID-19 pandemic, such as unexpected expenses for food, housing, course materials, technology, health care, or childcare” are not includible in gross income.
The IRS FAQs also indicate that taxpayers cannot claim a tuition and fees deduction, the American Opportunity Tax Credit or the Lifetime Learning Tax Credit based on tuition or textbook expenses to the extent that the taxpayer used an emergency financial aid grant to pay for the qualifying expenses.